Published 4:00 am, Thursday, October 31, 1996

Badly wounded two years ago when a key drug candidate flunked a clinical test, Sciclone Pharmaceuticals Inc. seems determined to claw its way back from the corporate junk heap.

The San Mateo drug-development company today will announce the signing of a key partnership agreement with the Japanese subsidiary of drug giant Schering-Plough Corp.

The deal extends a 1993 arrangement that gave Schering partial rights to Sciclone's lead product, a treatment for hepatitis called Zadaxin, aimed primarily at overseas markets.

Offering a dose of much-needed credibility on Wall Street, the new agreement would hardly matter for most early-stage drug companies trying to break into the U.S. market. But it's a major milestone for Sciclone and Donald Sellers, the company's globe-hopping new chief executive.

"Even if we didn't need it from the business standpoint, we need it from the PR standpoint," Sellers said, shortly before boarding yet another United Airlines flight for Hong Kong yesterday.

Zadaxin already has been licensed for sale in China, Singapore and the Philippines, but has yet to prove itself in Japan -- which along with Taiwan and Korea constitutes the bulk of the market in Asia, where hepatitis B is near epidemic levels.

The company desperately needs to show convincing evidence that Zadaxin, known generically as thymosin alpha 1, really works. The deal with Schering implies that at least one major pharmaceutical company is optimistic.

Make-or-break trials in Japan are slated to begin early next year. Until those results are in, today's deal offers "a tremendous psychological boost for investors," said Bradley Wilson, stock analyst at GS 2 Securities Inc. in Milwaukee.

Sciclone is trying to recover from one of the more spectacular disasters in the biotechnology industry. In April 1994, a clinical trial sponsored by another small company, which held U.S. rights to the drug at the time, showed Zadaxin barely effective for hepatitis B.

That sent Sciclone shares plummeting from a high of 16 1/8 to a low of 3 3/4 virtually overnight on Nasdaq.

"Basically, we were beat up and left to die by the side of the road," recalled Mark Culhane, chief financial officer.

Sciclone eventually bought out the other company's U.S. rights, and has steadfastly maintained that the poor results in 1994 were because of flaws in the study, not in the drug.

Those arguments, as well as a series of more favorable trial findings from overseas, helped Sciclone stock work its way back up to nearly 15 earlier this year. The summer slump in biotech stocks knocked it back into single digits. Shares closed yesterday at 10 3/4, up 3/8.

If the comeback continues, much of the credit will go to Sellers, an Asia specialist whose shirts are monogrammed in Chinese characters.

Sellers, 52, is a former Green Beret who served as a counterintelligence agent during the war in Vietnam. He spent nearly 20 years in international positions for Pfizer, Sterling Drug and Revlon Healthcare before joining Sciclone's international unit in 1993.

He assumed the CEO post in April. Fluent in Spanish, Japanese, Mandarin and French, Sellers still spends much of his time racking up frequent-flyer miles in pursuit of foreign distribution deals.

The company has filed for regulatory approvals in six small markets -- Hong Kong, Indonesia, India, Malaysia, Mexico and Cypress -- besides the three in which Zadaxin already has been licensed. Sellers promises to have 12 to 15 more applications filed by the end of the year in as many countries, including the plum market of Taiwan.

Because the bulk of hepatitis B cases are overseas, the company has no immediate plan to seek marketing approval from the U.S. Food and Drug Administration. Research continues into the drug's potential for hepatitis C, a much more widespread form of the viral ailment in the United States and Europe, as well as for a possible immune-boosting therapy against HIV.

Full results of a small U.S. trial examining Zadaxin in cases of hepatitis C are due at a meeting of liver experts in Chicago on November 12.

Amid all the uncertainties, Sellers refuses to predict when the company might record its first profit.

"Every regulatory agency in the world, no matter how small the country, takes itself just as seriously as the FDA," he said. "There's way too much risk for me to try making projections."

Some stock analysts expect profits to start showing up as early as 1998, based partly on Sciclone's unusually low overhead.

With only about 40 employees, the company crams its headquarters into the second floor of a San Mateo office building and contracts out for practically everything, including manufacturing facilities.

The company does none of the embryonic-stage research commonly performed at other biotech companies. It prefers instead to license rights to products hatched elsewhere. Sciclone this spring bought rights to its second compound, a possible treatment for cystic fibrosis called CPX.

"We're not a technology-platform kind of biotech company," Sellers said, adding that the company's idea of R&D is to focus exclusively "on the 'D.' We don't do any of the 'R.' "

Franklin Berger, analyst at Josephthal Lyon & Ross Inc. in New York, calculated that Sciclone can reach break-even if only 10,000 to 12,000 hepatitis patients undergo treatment, which would generate roughly $55 million to $60 million in revenue.

In Taiwan alone, hepatitis B infects an estimated 3 million people, although only a tiny fraction of wealthy customers are expected to seek a cure.

Most carriers of the blood-borne B virus manage to shake it off without lasting symptoms. Only about 10 percent to 15 percent develop chronic infections. Symptoms, if untreated, may include deadly liver cancer and cirrhosis.

The alternative offered by Sciclone is a six-month course of treatment with Zadaxin, taken by injection, at a cost of about $4,000 to $5,000. The only other commercially available hepatitis B therapy is the drug alpha-interferon, introduced in 1991.

That drug is similarly priced but reportedly doesn't work in many patients. It also has serious side effects that Zadaxin does not appear to have.

Besides claiming some advantages for his product, Sellers also touts Sciclone's go-it-alone strategy.

Its only marketing partnership is the deal with Schering-Plough, sought mainly because Japan is a notoriously tough market to crack for small U.S. firms.

Instead of sharing revenues with several partners, in most countries Sciclone plans to rely on Sellers' extensive drug-industry contacts to hire experienced sales agents and independent distributors.

"The only trick is that you need to know who all these people are," he said.